US stocks rallied on Tuesday, and some folks tried to draw a connection between that rally and Microsoft’s acquisition of Skype, based on the whole “Animal Spirits” notion, that big deal activity is generally a bullish sign of confidence.That argument may be flimsy, but there is a fundamental aspect to consider, which is that Microsoft used $8 billion of the $42 billion in cash it holds overseas, as noted by Eric Savitz at Forbes.
Cash held overseas by US multinationals is a big deal, as it can’t be repatriated or used as dividends without a huge tax being paid.
There’s been a lot of talk about a tax “holiday” that would allow companies to repatriate cash, but for the most part the Treasury Department has resisted this, instead preferring some sort of comprehensive reform to the system.
So the fact of the matter is that if companies start deploying their foreign cash for acquisitions, then at least at some level that’s cash being turned from an asset that’s just sitting there, into a productive asset for the company.
Now, bear in mind, it’s not necessarily so simple for companies to just use their foreign cash this way. The only reason Microsoft was able to do this is because Skype is actually headquartered in Luxembourg, as WSJ explains. But surely it’s not the only foreign-based company that will look juicy to a US multinational.
Suddenly, for all these big, lumbering companies sitting on mounds of cash, investors realise they have one path for deploying it.